Financial Analysis Of A2 Milk Company

Financial Decision Making

A2 Milk Company is the successor company of the established A2 Corporation Ltd that is a publically listed company that is listed in the New Zealand Stock Exchange, with its ticker symbol as ATM, the company commercializes as an intellectual property which is in relation to the A1 Product that is Protein-Free Milk which is solid under the A2 and the associated A2 Milk Brands, as well as several milk and milk related products like infant formula. The A2 Milk Company is the successor of A2 Corporation Ltd, a New Zealand based company that was founded in the year 2000. In the initial stages of operations the company began its operations which primarily that is focused especially on the given dairy farm breeding programs in order to develop herds that would be producing only A1 Protein-Free Milk. The key markets under which the operations of the company is placed is Australia & New Zealand, United States, United Kingdom and Chinese Export Market and Growth. The analysis of the company has been primarily done in the field of accounting standards that are adhered by the company for the purpose of recording and reporting the various financial transactions of the company. It was equally important to conduct an external analysis of the company that have been well performed with the help of the economic and social environment analysis. There were certain compliances that were followed by the company in terms of legal compliances that is well discussed.

The concept of social and economic performance of the group is integrated in the sustainability and environmental developments undertaken. In order to keep pace with the growing opportunities, it is ensured by the group that there is well alignment between the governance agenda and strategic, sustainable and environmental move. The estimates made by the management concerning future value is impacted by the change in the regulations, economic and trading conditions (Premium branded ASX and NZX-listed dairy nutritional company, 2019). The environmental and economic sustainability of the business of A2 Milk Company is supported by making investment in projects such as solar power, soil quality and recycling projects. The group manages to improve its social and economic environment by promoting environmental sustainable activities and building the arrangements of long term supply chain. There is an established system for reporting, controlling, identifying, monitoring and investigating the safety and health risks across the business (Martínez & Frías, 2015). In addition to this, the company is focused on strengthening the process, governance and technology control for maintaining compliance with the requirement of regulations and maintaining the privacy and integrity of the business activities. Therefore, from the analysis of the facts retrieved from the report, it is inferred that the business strategy of A2 Milk incorporates the social and economic environment.

Compliance with Accounting Standards

In terms of following of legal policies the management of the company has taken huge efforts in following and complying with the various set of legal policies that ranges from NZX Listing Rules to ASX Listing Rules. It is important to note that as stated by the management of the company in the field of continuous disclosure and associated practices that been well adopted with a set of various procedures, methods and guidelines with various set of applicable legal and other set of regulatory requirements. The various set of legal regulations that has been well adhered by the company is in the form of NZX Listing Rules and ASX Listing Rules. In addition the company has specifically followed all of the important considerations that are important in the field of the business operations of the company.

The tax amount that is payable in the current period is computed based on the taxable profit in the same year. Computation of tax liability of the group is determined using the tax rate and any adjustment to the amount of tax payable is done in the previous year. The method of balance sheet liability is used for accounting for the taxable profit and tax bases computation and the differences between the carrying value of liabilities and assets. A2 Milk Company determines the associated deferred tax assets and deferred tax liabilities by accounting for the differences that is usually between the carrying value of liabilities and assets in the financial statements. The tax rate at which the deferred tax assets and liabilities are determined when the liability is settled and asserts is realized (A2milkcompany.com, 2019). For the purpose of recoverability, the carrying amount of the given deferred tax rate is determined at each reporting period. Furthermore, when reviewing the deferred tax assets at each reporting date, it is required by the management to make judgment.  

The consolidated financial reports of A2 Milk Company has been prepared adhering to the requirements of the GAAP in New Zealand and also complies with the relevant and applicable standard of the International accounting standard board. In addition to this, company has used historical cost convention for preparing consolidated financial report. It is required by the management to make estimates, assumptions and judgment complying with the requirements of the financial reporting standard.  The reported amount of different elements of the financials such as liabilities, assets, expenses and income might be affected by the application of the policies. The notes to the financial statements describes the information about considerable areas of critical judgment and uncertainty in estimation when applying the accounting policies. All the revised, updated and new interpretations and standards have been effectively applied by the group and such standards being effective and relevant to the operations of the group in the current accounting period. IFRS 15 has been adopted by the group using the method of full retrospective and the financial elements such as earning per share, retained earnings, cash flow and total equity has not been impacted by the adoption of such standard. The accounting standard which is yet to be adopted by the group as it is considered relevant to the operations of business is new lease standard that is IFRS 16 (A2milkcompany.com, 2019).

Financial Statement Analysis

The financial statement analysis has been done for the company by taking the important set of financial data from the presented annual report of the company for the year 2018. The financial statement of the company can be well reviewed with the help of the key financial metrics including ratio analysis for the company that would be incorporating key financial data with the help of ratio analysis performed (Boyas & Teeter, 2017). Ratio Analysis that is an important quantifiable tool that can be well used for the various purpose of analysis of the stated financial performance of the company. The key ratio heads under which the financial performance of the company that has been well analyzed is the profitability ratio, liquidity ratio and the operational ratios.

The liquidity ratio shows the amount of coverage of the stated current assets of the company in correspondence to the current liabilities of the firm. It is consecutively important for the stated entity for maintaining an adequate amount of current assets with respect to the current liabilities of the company. The current ratio for the company was around 3.12 times in the year 2018 which has increased slightly to around 3.29 times in the year 2019 (Setiawan & Amboningtyas, 2018). The company has taken out various initiative in maintain a sound amount of current assets that is with respect to the reported current liabilities of the company. The quick ratio for the company was around 2.72 times and the same has increased slightly to around 2.76 times in the year 2019. From a standalone perspective it could be well said that the management of the company has taken several initiatives in the field of maintain a sufficient amount of current assets with respect to the current liabilities of the company (Raki?evi? et al., 2016).

The profitability ratio are an important financial metric showing the amount of profits that is generated by the company by using the assets or resources deployed. The analyzed key profitability ratio that were evaluated for the company were primarily in the form of Gross Profit Margin, Net Profit Margin and Return on Equity.

Gross Profit Margin: The ratio for the company was around 50.34% and the same has well increased to around 54.72%. The consistent increase in the ratio can be well attributed to the increase in revenue of the company with respect to the direct cost of goods sold expenses that has been incurred by the company (Kim & Im, 2017).

Net Profit Margin: The analyzed net profit margin for the stated company was around 21.22% in the year, which increased to around 22.06%, the increase in the ratio has been primarily because of the fact that the reported revenue of the company has increased in the trend period analyzed for the company.

Return on Equity: In terms of value creation the company has generated around 35.21% in the year 2018 and the same has increased to around 36.52%. The reported net profit for the analyzed company has increased consistently for the company but at the same time the equity figures have also predominantly increased (Haskins, 2017).

Valuation of Financial Assets

The valuation of financial assets for the company can be well done with the help of the reported assets that are given at the market or at their current prices. These assets are primarily the stated amount of current assets of the company the reported figure for the current assets in the year 2018 was around $499,702 and the value in the year 2019 was around $675,699 (Hawaldar, Lokesh & Biso, 2016).

Free Cash Flow Valuation

The free cash flow valuation model has been done for the company by taking the net income of the company, non-cash charges, increase in working capital and the reported capital expenditure by the company (Annual Report, 2019). The free cash flow valuation model that has been generated for the company for a sum of three years is shown below:

Operational Analysis

In order to analyse the impact of inventory, accounts receivable and payable management on the liquidity and profitability key ratios will be analysed. The key ratio that would be evaluated will be Inventory Turnover Ratio, Payable Turnover and Receivable Turnover Ratio (Annual Report, 2018).

Inventory Turnover Ratio: The inventory turnover ratio that has been analysed for the company that has been around 7.15 times in the year 2018 and the same has been around 5.45 times in the analysed year 2019. The ratio has particularly decreased for the company stating that more and more amount of goods are locked in inventory which can be easily sold and converted into cash, this might hurt the liquidity position of the company.

Accounts Receivable Turnover Ratio: The analysed ratio for the stated company was 15.6 times in the year 2018 and the same has increased predominantly to around 24.73 times in the year 2019. It is important to note that the increase in ratio has been primarily because of the fact that the receivable value has decreased consistently for the company. The reduction of amount receivable from the accounts receivable would result in less amount of bad debt and would be boosting the overall profitability of the company.

Accounts Payable Turnover Ratio:  The ratio stating the amount of accounts payable turnover ratio for the company has been around 4.20 times in the period 2018 and the same has been around 3.69 times in the year 2019. The reduction in the ratio is primarily due to the increase in payable which implies that the company is getting more amount of time in paying up the liabilities of the company which would be boosting up the liquidity position of the company.

Recommendations

The above case study analysed which was in the form of annual or financial information presented by the A2 Milk Company can be well evaluated with the help of the Capital Budgeting Decisions whereby the cash flows that would be generated from the company as shown in the free cash flow model can be used for the purpose of analysing the investment profitability and viability. Profitability marks the viability of any investment and when evaluated from the view point of A2 Milk Company it is well estimated that the company is expected to create a sufficient amount of net profit trend that it has shown in the last financial years.

References

A2milkcompany.com. (2019).  Retrieved 4 November 2019, from https://thea2milkcompany.com/wp-content/uploads/The-a2-Milk-Company_FY19-Annual-Report_double-pages-1.pdf

Annual Report (2018). Thea2milkcompany.com. Retrieved 4 November 2019, from https://thea2milkcompany.com/wp-content/uploads/A2M-Annual-Report-FY18.pdf

Annual Report (2019). Thea2milkcompany.com. Retrieved 4 November 2019, from https://thea2milkcompany.com/wp-content/uploads/The-a2-Milk-Company_FY19-Annual-Report_double-pages-1.pdf

Boyas, E., & Teeter, R. (2017). Teaching Financial Ratio Analysis using XBRL. In Developments in Business Simulation and Experiential Learning: Proceedings of the Annual ABSEL conference (Vol. 44, No. 1).

Datta, P., Gopalakrishna-Remani, V., & Bozan, K. (2015). The impact of sustainable governance and practices on business performance: an empirical investigation of global firms. International Journal of Sustainable Society, 7(2), 97-120.

Haskins, M. E. (2017). Remington, Inc.: Instant Insights for Financial Ratios. Darden Business Publishing Cases.

Hawaldar, I. T., Lokesh, L., & Biso, S. S. (2016). An empirical analysis of financial performance of retail and wholesale Islamic banks in Bahrain. American Scientific Research Journal for Engineering, Technology, and Sciences (ASRJETS), 20(1), 137-147.

Kim, J., & Im, C. (2017). Study on corporate social responsibility (CSR): focus on tax avoidance and financial ratio analysis. Sustainability, 9(10), 1710.

Martínez?Ferrero, J., & Frías?Aceituno, J. V. (2015). Relationship between sustainable development and financial performance: international empirical research. Business Strategy and the Environment, 24(1), 20-39.

Premium branded ASX and NZX-listed dairy nutritional company. (2019). The a2 Milk Company. Retrieved 4 November 2019, from https://thea2milkcompany.com/

Raki?evi?, A., Miloševi?, P., Petrovi?, B., & Radojevi?, D. G. (2016). DuPont financial ratio analysis using logical aggregation. In Soft computing applications (pp. 727-739). Springer, Cham.

Setiawan, H., & Amboningtyas, D. (2018). FINANCIAL RATIO ANALYSIS FOR PREDICTING FINANCIAL DISTRESS CONDITIONS (Study on Telecommunication Companies Listed In Indonesia Stock Exchange Period 2010-2016). Journal of Management, 4(4).

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